Economic Catastrophe

Things are very bad out there.  That is why these rallies are getting sold after just one day.  The stock market extrapolates the current situation and the longer it goes on, the further out it extrapolates.  It's 4 weeks of nonstop selling, and eventually investors adapt, and for one, they don't rally stocks on a Friday afternoon in anticipation of a central bank intervention.  They sell them off on a Friday because they got their heads handed to them the following Monday when they bought the strength on a Friday afternoon. 

I find it laughable when investment analysts think this will be like 2008 for economic growth, trying to factor in a strong rebound in Q3 and Q4 2020.  Unless they are fortune tellers and can tell how prevalent the coronavirus will be in the fall and winter, then they are just making wild guesses.  The number one thing that will stabilize this stock market is not a bigger bailout or bigger Fed QE, but a decision by the federal government to have a month long nationwide lockdown to try to eliminate the coronavirus.  2 weeks is too short.  A month may be too short.  The incubation period can be quite long for this monster of a virus. 

This brings me to a Wall St. psychology chart about where we are in the cycle:  We are definitely past the denial stage, and probably in the middle of the panic stage, but not yet at capitulation.  So getting there, but I would like to see few bottom pickers and more consecutive down days before I feel comfortable going long. 

Its easier to predict a bottom when there is continued selling without rally attempts.  But there continues to be a rally attempt every couple of days, so sustained selling is cut off, making it hard to pick a bottom off a capitulation point.  So we keep getting these one day rallies that give investors hope only to take it away the next day.  I want to see sharp sustained selling for 3 days to really get to a panic point and attractive price levels, but the dip buyers are stubborn and insistent on not missing the V bottom. 

Right now, as I write, the SPX futures are trading 2270, which is near the week's lows, on a Friday.  If we can get a sharp move lower next week, that will open up the door for a strong rally into the end of the month as pension fund rebalances from bonds to stocks will be massive at the end of this month.  From Morgan Stanley:

Now MS are joining GS with the >$150bn of equity buy flow that will happen into month-end. That is on par with what CTAs sold on the way down....Could we get a "crash" on the upside in a massive bear market rally squeeze?

“MS QDS estimates $160bn of global equity needs to be bought and even more fixed income sold for pensions and asset allocators to rebalance portfolios over March month-end. With this flow generally starting roughly 5-days before month end and peaking at the end of the month, it should build by mid next week"

And ideal buy area would be the 2015 highs of SPX 2130 before the August waterfall decline.  There was a lot of resistance in that area.  The market likes to fill a vacuum, and there wasn't much time spent between 2200 and 2600.  I think that will change this year.  

Sunday reopen will be interesting in S&P futures.